Another milestone in the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA) was  passed on May 12, 2014 when the Cayman Islands Tax Information Authority (TIA) issued its draft Guidance  Notes on the international tax compliance requirements of the Intergovernmental Agreements between the  Cayman Islands, the U.S. and the U.K. (U.S. IGA and U.K. IGA).  The Guidance Notes will be finalized  following the June 6 deadline for any feedback from the Internal Revenue Service (IRS), HM Revenue &  Customs (HMRC) and the Cayman Islands financial services industry.

The Guidance Notes are intended to provide practical assistance to businesses, their advisers and the TIA in  dealing with the application of the IGAs and to accompany the amended Tax Information Law (2013 Revision)  and the Tax Information Authority (International Tax Compliance) (United States of America) Regulations  2014 and Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations 2014.

The Guidance Notes assist Cayman Islands entities to answer these key questions:

  1. Am I a Financial Institution?
  2. Do I maintain Financial Accounts?
  3. Do I need to register with the IRS and, if so, by when and how?
  4. Do I need to report any information and, if so, what information, when and how?
  5. I maintain a Financial Account for a NFFE. What are my obligations?

Most of that information is not new, but the consolidation of guidance on both the U.S. IGA and U.K. IGA and  implementing legislation into a single hyperlinked document should prove very helpful to users. The Cayman  Islands has now set the standard for Competent Authorities in other offshore jurisdictions that must comply  with both the U.S. IGA and the U.K. IGA.

The DMS FATCA Task Force is pleased to highlight a few areas of important analysis impacting Cayman  Islands Investment Entities, namely IRS Notice 2014-33, CIV/QCIV interpretation, direct reporting NFFEs,  CSX, Relationship Manager, and payments to NPFIs.

IRS Notice 2014-33: FATCA Soft-Opening

On May 2, 2014 the U.S. Department of the Treasury and the IRS issued IRS Notice 2014-33, which promised  to soften the implementation of FATCA in respect of IRS enforcement and administration obligations, good  faith actors and also specifically in respect of pre-existing entity accounts.  Treasury intends to introduce  these transitional periods into the U.S. Regulations and the Model 1 and 2 IGAs. Taxpayers and IGA partner  jurisdictions, such as the Cayman Islands, may rely upon the Notice with immediate effect pending the  Treasury’s proposed amendments to the FATCA regulations and IGAs.  The Guidance Notes do not yet  reflect those transitional periods.

Collective Investment Vehicle (CIV) vs. Qualified Collective Investment Vehicle (QCIV)

These two types of exemptions are available to an Investment Entity, however it was unclear how they may  apply to a Cayman Islands Investment Entity since the U.S. IGA describes the CIV – but not the QCIV –  whereas the U.S. FATCA Regulations do the opposite. The Guidance Notes now clarify that generally these  exemptions are not available to the typical Cayman Islands investment fund.

A mutual fund regulated by the Cayman Islands Monetary Authority will qualify as a CIV and be exempt from  FATCA registration and reporting requirements only if all of its interests (including debt interests in excess  of $50,000) are held by or through one or more exempt beneficial owners or Active NFFEs. Interestingly,  the U.S. IGA would also permit a CIV to have Financial Account Holders who are U.S. Persons that are not  Specified U.S. Persons, or Financial Institutions that are not Nonparticipating Financial Institutions. A CIV  is a nonreporting financial institution for the purpose of the U.S. IGA and so would be categorized as NonReporting IGA FFI, a type of Certified Deemed-Compliant FFI for the purposes of the U.S. Regulations and  the newly FATCA-ized W-8 Forms.

A QCIV must be an Investment Entity and must be regulated as an Investment Entity in the Cayman Islands  and every other country in which it operates; or its manager must be regulated with respect to the QCIV  in all of the countries in which the QCIV is registered and in all of the countries in which the investment  fund operates. All equity investors, direct debt investors with an interest greater than $50,000 and other  Financial Account Holders must be limited to Participating Foreign Financial Institutions, Registered  Deemed Compliant Foreign Financial Institutions, retirement funds classified as Exempt Beneficial Owners,  U.S. Persons that are not Specified U.S. Persons, Non-reporting IGA Foreign Financial Institutions, or other  Exempt Beneficial Owners. A QCIV is a registered deemed-compliant FFI that is non-reporting; i.e. it must  register with the IRS and obtain a Global Intermediary Identification Number (GIIN) but does not have annual  reporting obligations to the TIA.

Direct Reporting NFFEs

The Guidance Notes reflect that certain new categories of entities have been created by revision to the  U.S. Regulations [9657] dated March 6, 2014 which revised [9610] dated January 28, 2013.  This is helpful  because the U.S. IGA is dated November 29, 2013 and therefore omits reference to “direct reporting  NFFE” and a “sponsored direct reporting NFFE.”  The Guidance Notes also reflect the revised definitions of  sponsoring entity, excepted NFFE and Limited Life Debt Investment Vehicles in the U.S. Regulations.

Cayman Islands Stock Exchange (CSX) and FATCA Obligations

The Guidance Notes confirm that the CSX is not considered to be an established securities market for the  purposes of the IGAs.  Consequently, Equity or Debt Interests listed on the CSX will be Financial Accounts  under the IGAs and the issuer will have the usual FATCA Obligations in respect of them if it is a Registered  Deemed-Compliant FFI.  CSX issuers include investment funds, specialist debt, corporate debt and ILS/Cat  Bonds.

Definition of Relationship Manager

The Guidance Notes define “Relationship Manager” to mean “any person who is an officer  or  other  employee   of  the  Financial  Institution  assigned  responsibility  for specific account holders on an ongoing basis, and  who advises [individuals with High Value Accounts] regarding their accounts and arranges for the overall  provision of financial products, services and other related assistance.”  In practice, the typical Cayman  Islands Investment Entity will need to delegate this function to an employee of its investment manager who  handles investor relations, even in the usual case where the fund administrator provides registrar and transfer  agent services.

Payments to NFFEs

Cayman Islands Financial Institutions will not be required to withhold on U.S. Source Withholdable Payments  themselves unless they are qualifying intermediaries, withholding foreign partnerships or withholding foreign  trusts.  Except in those cases, whenever a Financial Institution pays, or acts as an intermediary for the  payment of a U.S. Source Withholdable Payment to a NPFI, the Financial Institution is required to provide  information to the ‘immediate payor’ of that income. The immediate payor is the person with withholding and  reporting obligations to the U.S. authorities. The information that must be provided in respect of the payment  is required for withholding and reporting to occur. Apparently, this is an ongoing obligation commencing  on July 1, 2014.  Reporting Financial Institutions must also report to the TIA the aggregate amount of all  payments to each NPFI during 2015 and 2016 by May 31 of the following year.  Apparently, these obligations  to report to immediate payors and to the TIA apply, even if the NPFI does not have a Financial Account with  the Cayman Islands Financial Institution, such as payments made pursuant to an OTC derivatives governed  by an ISDA Master Agreement.

A Role for Third Party Service Providers

All Financial Institutions that maintain Financial Accounts must take some action, the extent of which depends  on a number of factors including whether the holders are “Specified Persons” and Nonparticipating Financial  Institutions (NPFIs) and the value and nature of the Financial Account. The Guidance Notes confirm that  a Financial Institution can rely on a third party service provider to fulfill its obligations under the Cayman  Islands Regulations, but the obligations remain the responsibility of the Financial Institution and so any failure  will be seen as a failure on the part of the Financial Institution.